Lockdown living has meant that it’s been a brilliant year for food delivery services. One of the biggest players in this market is FTSE 100 share Just Eat Takeaway.com (LSE: JET).
Just Eat Takeaway’s revenue rose by 44% to €1bn during the first half of the year. Restaurant numbers rose by 32% and the value of food ordered on the platform climbed 42% to €5.7bn.
The shares performed well too. At least they did until the start of November. Since good news on vaccines caused the stock market to surge higher, JET’s share price has fallen by about 15%. Unfortunately, I think these shares could have further to fall.
What I like about JET
Despite my concerns, I think there’s a lot to like about Just Eat Takeaway. It’s one of the biggest operators in this sector, with a strong brand and growing economies of scale. Unlike some rival delivery operators, JET is expected to report an after-tax profit for 2020.
The company has become a FTSE 100 share by buying up rival operators in its markets, with the aim of becoming the dominant brand. The acquisition of Takeaway.com earlier this year was the biggest deal yet, but JET is also in the process of acquiring US-listed Grubhub. This deal was valued at $7.3bn when it was agreed in June.
JET’s management is currently increasing its marketing spend in countries where the firm doesn’t yet have control of the market. One example of this is the UK — rumour has it that rapper Snoop Dogg was paid £5m for the television ad campaign that’s run this autumn. I expect positive results.
Why I think this FTSE 100 share will fall
I think it’s fair to say that the pandemic has created the most perfect market conditions anyone could imagine for food delivery. In most of JET’s main markets, restaurants and bars were closed for extended periods. At the same time, millions of people were stuck at home, often while still receiving their normal pay.
Performance this year reflects this unusual situation. The company has seen order numbers rise by 37% this year, from 298.4m to 408.3m. JET has also continued to expand. In the UK, for example, new partnerships with McDonald’s and Greggs have added a total of 1,100 new restaurants.
However, we’ve already seen during the summer how people are quick to return to restaurants and pubs as soon as they reopen. I’m not sure that the impressive growth rate seen this year will be sustained.
An expensive takeaway
I think this is a good business in a sector that will keep on growing. But Just Eat Takeaway shares already trade on around 100 times 2021 forecast earnings.
Even for a small growth stock, that would be a demanding valuation. But smaller companies can generally grow faster. Just Eat Takeaway is already a FTSE 100 share with a £12bn valuation. How much bigger will it get?
If the firm’s earnings doubled again from 2021 forecast levels, JET would still trade on 50 times earnings. I think that’s probably where the shares should be today. But for JET’s valuation to fall to that level, its share price would have to fall by more than 40%.
In my view, the risks of investing in JET today are greater than the potential rewards. For this reason, I’m not buying the shares.